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Strong 2nd Quarter for Mortgage Banks; Cash vs. Security Sales Primer; New Program for Service Members

Aug 27 2014, 6:00AM

The
month-end funding push is in full swing. There are plenty of jumbo
loans on the Atlantic and Pacific Coasts (providing fodder for the
smattering of jumbo securities), but the push for affordable housing has
moved inland to where it is actually viable. (This article
from last month illustrates the change in demographics for the middle
class moving toward the center of the U.S.) Regardless of where one
lives, as this commentary continues to mention the gap between the haves
and have-nots continues to widen, and now the Census Bureau quantifies it, as well as the gap between younger and older families.

Mortgage banking revenue a fickle mistress. For most, the first quarter was poor (a charitable term), but lenders know that things bounced back in the 2nd quarter of 2014,
and now the MBA gives us some numbers to hang our collective hats on:
independent mortgage banks and mortgage subsidiaries of chartered banks reported a net gain of $954 on each loan they originated in the second quarter, up from a reported loss of $194 per loan the quarter before. "The gains seen in the second quarter come after first quarter losses that were likely triggered by a variety of factors
including the implementation of new Dodd-Frank regulations and
extremely low origination volumes," said Marina Walsh, MBA's Vice
President of Industry Analysis. "Some loan closings may have been pushed
into the second quarter, resulting in an increase in profitability as
per-loan production costs declined."

What do Wells Fargo, Quicken, Citi, Ocwen, and Bank of America have in common? They are all part of a mortgage program announced by the Obama Administration
yesterday focused on members of the military. Quicken, for example,
sent out a press release saying, "Quicken Loans Partners with the Obama
Administration to Ensure Military Members Receive Mortgage
Protections...The nation's largest VA lender and second largest retail
lender immediately begins notifying service members of the flexible
financial protections that their active duty triggers under federal
law...a partnership with the Obama Administration to make sure active-duty
military members receive the benefits their service entitles them...has
agreed to enhance the financial protections that active military members
are granted under the Service Members Civil Relief Act (SCRA). The SCRA
is a federal law that assures protection for military members as they
enter active duty. In addition to other financial protections, the law
allows flexibility for active military members related to their mortgage
interest rates, mortgage late fees and mortgage foreclosure
protection."

Those
five lenders will be reviewing their entire servicing portfolios,
monthly, and compare them to the Department of Defense's current
database to proactively identify borrowers that are also active duty
members of the military. They will then reach out to the active-duty
homeowner or their closest available relative and inform them that
(Quicken/BofA/Wells/Citi/Ocwen) will be applying any of the special
benefits they are entitled to receive under the SCRA.

As
a side note, servicing values are critical. Any lender with servicing
on its books, bank or non-bank, can never rule out a transaction if
servicing values were to reach levels that management thought were
abnormally high that would mitigate the negative effects of a tax hit or
(for a bank) potentially losing the continuing relationship between the
depository and its customers, such as capturing refinancings.

Fannie
& Freddie's end-run around the large aggregators and marketing
directly to the small and mid-sized lenders is well known in the
industry. But smaller lenders may not have the expertise or experience
(yet) in analyzing some basic decisions between selling loans directly
to F&F (through the cash window) or securitizing loans themselves.
It is helpful to have a primer on what that means, and knowing what
might be going on behind the scenes influencing your decisions: A Primer on Cash Sales Versus Securities.

The
Financial Times reports that Wells Fargo CEO John Stumpf has warned the
GSEs (government-sponsored enterprises) that they must stop being so
quick to accuse banks of faulty underwriting and then forcing them to
repurchase soured loans. "We're just not going to make those loans and
there's going to be a whole bunch of Americans that are underserved in
the mortgage market...If somebody makes a payment for - let's say - three
years, the risk ought to transfer then to the insurance company ... If
you're going to pick through each one looking for a technical fault not
to pay your insurance policy we're not going to be in that business." On
the retail side, the industry has watched Wells lower its standards on
jumbo loans and FICO requirement on FHA product.

A
Secondary Marketing gal from the south-east writes, "Rob, thanks for
giving us servicing color, by way of MSR tapes you include in your
commentary from time-to-time. It's interesting to see all the different
collateral composites." You're welcome, and I agree. Here's a small
sampling since our my last blurb....I've seen two deals from Phoenix Capital, the
first was a $1.1 billion bulk of fixed rate Fannie Mae and Freddie Mac
MSR's, with a pool characteristic of: 69% FNMA, 31% FHLMC, 85% 30yr term/15% 15yr term, 4.398% WAC, Avg Bal $237K, 51% CA geography, WaFICO 738, WaLTV 85%, 48%
Correspondent, 41% Wholesale and11% Retail....the second a flow deal of
$30-$35 million per month of Freddie Mac MSR's which will all be 100%
retail originations, with 89-94%
30yr term; 6-11% 15yr term, average balance between $233-$244k, WaFICO
750-752; WaLTV 81-83%, CO (50%), UT (37%), & CA (7%) geography....and MountainView Servicing Group, LLC selling a $348.4 million FHLMC/FNMA non-recourse servicing portfolio with is 99% fixed rate and 100% 1st
lien product, WaFICO of 755, WaLTV 75%, WAC of 4.18%, top states:
Colorado (61.3%), California (15.0%), Arizona (6.5%), and Illinois
(6.0%) with an average loan size of $234,156.

Let's turn to some investor, lender, and vendor-specific news...

"Rob - I took a quick perusal of NationStar's Defect 'pie chart' and noticed that they don't even have a category for compliance
defects, many of which flow through to the loan purchaser. I wonder what
will happen to NationStar in the future when either the regulators or a
class action attorney discovers that it purchased billions without
analyzing their loans for compliance." Editor's
note: questions or comments should be directed to your NationStar rep -
my guess is that the company is accounting for them somehow.

And here's another comment about trends. "Good morning Rob. I have several brokers telling me that more lenders are offering programs where the lenders are ignoring 2106 unreimbursed employee expenses for 'true' W2 borrowers.
They do this by executing the 4506T for W2 wages only so the tax
transcripts would not show any 2106 expenses. One of my brokers sent me a
flyer issued by --------------- Wholesale. He also told me that this
applies to both their conventional and FHA loans. If the home were to go
into foreclosure and the investor does a forensic underwrite, might
they not claim misrepresentation as 2106 expenses were not disclosed and
not used to qualify the borrower? Might this not violate the Ability to
Pay and Safe Harbor provisions? (Editor's note: it sure sounds like it,
but my guess is that their lawyers took a good look at it. You can
always report things anonymously.)

Citibank has updated its ineligible originator list.
This list shows brokers, correspondents or other loan originators and
any other parties with any role in any loan origination which is
prohibited from having any role in the origination of any loan submitted
to Citibank for purchase.

M&T Bank
posted updates to its agency underwriting eligibility standards that
includes re-subordination requirements, mortgage write-offs, foreclosure
and bankruptcy on the same mortgage, waiting periods for derogatory
events, and co-op flip tax. Additionally, the USDA guarantee fee is
increasing from .40% to .50% effective with conditional commitments on
or after October 1st.

Flagstar Wholesale
is reminding clients LPMI price adjustment updates and rate sheet
updates went into effect August 11th. Also, starting August 18, the
Lending Training team has created live training opportunities to assist
correspondent customers with the process and workflow for the Disclosure
Compliance Module in Flagstar's system. Michigan Flooding may require
homes in specified zip codes to obtain satisfactory re-inspection dated
on or after August 13, 2014. Rural Development has published an interim
final rule for Guaranteed Rural Housing loans to replace its existing
rule. The interim final rule will become effective on September 1, 2014.

Effective
Friday, August 15, the Survey Fee applicable to new registrations under
the Fannie Mae HomeStyle Renovation, and the Fannie Mae HomePath
Renovation, programs will be increased to $750.

Fifth Third Correspondent Lending
is reminding clients that POA eligibility is restricted to limited
situations and includes specific criteria. Additionally, its appraiser
and appraisal company Do Not Use List has been updated and posted to
Correspondent Connect.

New Penn Financial WholesaleHome Buyer Power, a non-QM jumbo product, is available to its wholesale partners.

Freddie Mac launched the new and improved Workout Prospector®. This brief video shows the functional changes and benefits to streamline existing processes.

If
someone can figure out this economy, please let me know. We had a lot
of news out last week, and yesterday the cavalcade continued: two house
price indices showed decelerating price appreciation which helps
affordability, consumer confidence is now as high as it was in late 2007
(just before the Great Recession) and manufacturing activity is
clicking along. Durable goods orders were revised up for June and jumped
22.6% in July, albeit due to spectacularly large one-off aircraft
orders at Boeing. (Ex-transportation Durable Goods were -.8 %.) Be careful with statistics! Values are increasing, just at a slower rate, so be careful about headlines like "Widespread Slowdown in Home Price Gains According to the S&P/Case-Shiller Home Price Indices."
The FHFA (which focus on Fannie & Freddie numbers) House Price
Index has reported gains for 12 consecutive quarters - it is really hard
to argue that housing is not recovering.

Yet
there is seems to be a disconnect between bonds and stocks. If the
economy is doing so well, as indicated by records being set by the
S&P 500 and other stock indices, shouldn't rates be moving higher?
Nope - they're still low. Perhaps investors just don't have anywhere
else to put their money - so let's be content with these low rates which
could be here for quite some time.

There
isn't much in the way of news today, and things have been quiet
overnight. We will have the MBA survey on lending activity and mortgage
rates. After that come the Treasury auctions, first at 11:30am on 2yr
floating rate notes ($13 billion) then the 1pm fixed rate sale of $35
billion 5yr maturities. For numbers, the
10-yr T-note yield at the close of Tuesday was 2.39% and in the very
early going today we're at 2.38% and agency MBS prices are better by a
smidge.

About the Author

Rob Chrisman began his career in mortgage banking - primarily capital markets - 27 years ago in 1985 with First California Mortgage, assisting in Secondary Marketing until 1988, when he joined Tuttle & Co., a leading mortgage pipeline risk management...
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